South Africa: Karoo development imminent despite falling oil prices

Karoo desert, South Africa
Source: DollarPhotoClub

Falling oil prices have caused many companies to cut back on production as profit margins get squeezed, but they will not – it seems – affect shale exploration in the Karoo desert, South Africa.

Regulations for shale gas exploration in South Africa are expected to be published in the Government Gazette in the next few weeks, opening the way for a licensing round as early as July or August. Exploration is expected to commence soon afterwards.

The Karoo Basin in central and southern South Africa is a major sedimentary basin, extending across nearly two-thirds of the country, which contains thick organic-rich shales. At around 485 trillion cubic feet of estimated shale gas reserves, the U.S. Energy Information Agency (EIA) puts South Africa’s Karoo desert at the fifth place when it comes to world shale gas deposits.

While global exploration activities get scaled down due to low oil prices, the Karoo Basin development should not be affected as the produced shale gas will be used to produce energy rather than fuel.

Jeremy Wakeford, chairperson of the Association for the Study of Peak Oil South Africa, told the Mail & Guardian this week that planned shale gas production in South Africa “will continue on its course irrespective of what’s happening in the global oil market”, and said it would be mainly used for electricity generation. “Companies will likely see economic value in continuing exploration, seeing where electricity prices are at, and if it’s used for electricity it’s not really a substitute for oil.”

According to the EIA, the average cost for US plants entering service in 2019 shows the cost of coal generation comes in at $60 per megawatt hour, whereas the cost of power from gas could be as little as $14.3 per MWh.

So far four exploration companies and one joint venture entered the Karoo Basin. Falcon Oil & Gas Ltd. was an early entrant into the shale gas play of South Africa, obtaining an 30,000 km2 Technical Cooperation Permit (TCP) along the southern edge of the Karoo Basin. Shell obtained a larger 185,000 km2 TCP surrounding the Falcon area, while Sunset Energy holds a 4,600 km2 TCP to the west of Falcon. The Sasol/Chesapeake/Statoil joint venture holds TCP area of 88,000 km2 and the Anglo Coal TCP application area of 50,000 km2 is to the north and east of Shell’s TPC.

Although investment decisions are heavily influenced by energy prices, according to Kumbirai Gundani, an associate at Frost & Sullivan consultants, current challenges would not be enough to deter oil companies from entering the latest licensing round.

Speaking to the Mail & Guardian he said: “Once they have an exploration licence they have it for three years and can renew it three times. No one gives up that opportunity. Fluctuating oil prices are known to the market, but it is important to have the licence that when it becomes viable you can start drilling.”

Royal Dutch Shell, one of the applicants for a shale exploration licence in the Karoo, said it did not take a particular view on near-term oil prices and, with its strong balance sheet, took a longer-term view on financing and project economics.

“The decline in oil prices is very much part of the inherent volatility in our industry. We plan our strategy around an expectation of such volatility: the portfolio needs to be attractive and resilient in a wide range of circumstances,” the company said.

“It underlines the importance of our drive for better performance management, to keep a hold on costs and spending, to improve the balance between growth and returns and to improve our capital efficiency.”

In response to questions this week, the department of mineral resources said an announcement on the state of shale gas regulatory framework is imminent.

The department said “commodity prices, including those of oil, do affect the viability of development. However, it has to be pointed out that commodity prices are cyclical and this is taken into consideration in the assessment of the viability of the identified projects.”

Source: Mail & Guardian

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